The Distress of Skye Bank - Unintended Consequences

The
CBN revoked the operating license of Skye Bank two years after its regulatory
intervention and subsequent injection of funds. Consequently, a bridge bank,
Polaris, in collaboration with Asset Management Corporation of Nigerian
(AMCON), will turnaround the operations of the distressed bank. The
optimization of internal business process will position the bank for a
competitive takeover by interested buyers.

Underlying problems remain apparent

The
struggling systemically important bank (SIB) had been in dire need of a
recapitalization since its failure to pass a liquidity stress test in 2016.
Since then, the bank had relied on the CBN for liquidity support and
intervention.

The
new arrangement with Polaris will help recapitalize the bank; injecting N786bn
into the defunct bank to clean up its negative equity position. The regulatory
authorities have chosen to maintain the current management team and promised a
seamless transition to depositors.

Equity investors remain the biggest losers

In
a stock market driven largely by technical analysis and speculations, and less
of fundamental assessment, Skye bank’s stock gains soared to a high of 210% in
2018 (year-to-date). The decision to wind down the bank resulted in a
write-down of Skye Bank’s market capitalization from N10.7bn to zero value.
This will further dampen the confidence factor, which is yet to recover from
the MTN saga and political fracas in the run-up to elections.

However,
the decision of investors to invest in a bank that failed to publicly publish
its financial performance since 2016 further accentuates the risk of fallout.

Implications on financial system stability

The
decision by the CBN to extend support to Skye Bank stemmed from the need to
prevent a financial system failure.

History
has shown that what precedes a financial crisis is either a liquidity
crunch or a capital deficiency. Skye Bank struggled with
both criteria. This proves that there is no bank that is too big to fail.

The
collapse of Skye Bank is expected to be a wakeup call for the regulators on the
need to enforce a robust risk regulatory framework. This framework should
extend beyond periodic regulatory examinations. These red flags will help curb
the reputational and financial hemorrhage of a corporate meltdown.

Way Forward

The
corporate failure of Skye Bank further emphasizes the need for robust corporate
governance codes. The efforts by capital market players to amplify board
corporate governance codes need to be taken up by the regulators as well. This
will complement efforts by banks to improve their company rating, as well as
their attractiveness to investors.